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ISS U E S W I T H
FEAS I B IL IT Y ST UDI ES
IN M I N I N G A R B ITRAT I O NS
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CORPORATE DISPUTES MAGAZINE
JAN-MAR 2014 ISSUE
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JAN-MAR 2014
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FEATURE
The return of the
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Options for directors
in M&A litigation
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PERSPECTIVES
P ERS P E CTIV ES
ISSUE S W I T H
F EASI BI L I TY S T U D I ES
I N MIN I N G AR B I T RAT I O NS
by DAVID PERSAMPIERI
> CHARLES RIVER ASSOCIATES
F
easibility studies are often at the heart of
disputes in the mining and mineral processing
industries. Conflicts often arise when the
What is a feasibility study?
According to the Canadian Institute of Mining,
Metallurgy and Petroleum, a feasibility study is
actual execution of a mining project differs from
“a comprehensive study of a deposit in which all
what was anticipated in the feasibility study. In many
geological, engineering, operating, economic and
cases, these conflicts have resulted in international
other relevant factors are considered in sufficient
arbitration proceedings between the parties. In
detail that it could reasonably serve as the basis for a
this article, we review a number of the key sources
final decision by a financial institution to finance the
of disagreement, and discuss means by which
development of the deposit for mineral production[.]”
negotiating parties can seek to minimise and control
(‘Standards and Guidelines for Valuation of Mineral
the effects of project uncertainties stemming from
Properties’, Special Committee of the Canadian
the feasibility study phase.
Institute of Mining, Metallurgy and Petroleum on
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ISSUES WITH FEASIBILITY STUDIES IN MINING ARBITRATIONS
PERSPECTIVES
Valuation of Mineral Properties (CIMVAL), February
to be performed on sample materials. This can lead
2003, p. 9.) The principal purpose of a feasibility
to uncertainty from a large number of factors. For
study is to demonstrate the technical and economic
example: (i) samples may not be representative of the
viability of a proposed project to expert third parties
overall ore body; (ii) ore samples may not have been
for the purpose of obtaining financing for the project.
fully characterised in all aspects of mineralogy and
If a feasibility study demonstrates that a project is
metallurgy; (iii) test results may be highly variable,
technically and economically viable, and its sponsors
leading to potentially more or less conservative
are successful in securing financing (either from
processing assumptions; (iv) market conditions may
internal corporate sources or external
parties), a project will then typically
proceed to a definitive engineering and
cost estimate stage.
Feasibility studies are notoriously
unreliable ex post. For example, in a
paper evaluating the performance of
feasibility studies, Chris Grypton of Hecla
Mining Co. states, “an analysis of 60
“The principal purpose of a feasibility study
is to demonstrate the technical and economic
viability of a proposed project to expert third
parties for the purpose of obtaining financing
for the project. ”
Western Hemisphere mining projects
developed since 1980 leaves little room
for doubt that the average feasibility-study estimate
change between the time of the feasibility study and
is a lot less accurate than you or your banker would
actual project start-up and operation; and (v) costs
like.” (‘How Have We Done – Feasibility Performance
for critical input factors (e.g., construction labour,
Since 1980’, Chris Grypton, E&MJ, January 2002,
supplies, energy) can change dramatically from those
pp. 40-41.) On average, the projects in his sample
assumed in the feasibility study.
exceeded estimates by 22 percent, and almost half
had cost overruns of 20 percent or more.
These and other factors can result in the actual
situation faced by a mining project differing
Why do feasibility studies perform so poorly on
substantially from the situation that was anticipated
average? In most cases, mining project feasibility
in the feasibility study. These differences can lead to
studies are developed using a set of assumptions
changes in the project execution that can lead in turn
that are based on test results or other experimental
to disputes between project sponsors, investors and
information. It is common for test work and analyses
other stakeholders.
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ISSUES WITH FEASIBILITY STUDIES IN MINING ARBITRATIONS
PERSPECTIVES
Given that the execution of mining projects can
necessary due to ‘unforeseeable’ changes in either
differ from what was expected during the feasibility
market conditions, mineral characteristics or other
study, it is not surprising that disputes often arise.
additional information that become known only after
Some of the major sources of disputes include: (i)
the feasibility study was completed.
cost overruns; (ii) failure to meet production or cost
targets; (iii) changes in product mix; (iv) changes in
project scope; and (v) failure to meet employment
projections.
In these disputes, the feasibility study is often used
Feasibility study limitations and
discrepancies
In most cases, feasibility studies involving mining
projects will contain significant background material
as the baseline comparator. It is not uncommon for
regarding the bases for the assumptions and design
one side to cite the fact that the feasibility study
criteria used in the technical and economic sections
was not followed as the primary basis for a claim
of the study. These sections are often quite detailed
against the project sponsor. On the other side, project
and contain important information regarding the
sponsors will often argue that the changes were
samples analysed, test work performed and the
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ISSUES WITH FEASIBILITY STUDIES IN MINING ARBITRATIONS
PERSPECTIVES
results of the tests. For a technical or industry expert,
detailed background information is not contained
these sections can provide a wealth of information
in the feasibility study, it is instructive to evaluate
regarding the degree of certainty associated with the
the claims and representations made by the project
design assumptions. The quality and robustness of
developer during the negotiation process. While
the technical testing can have a significant effect on
differences of opinion as to the cause of changes are
the overall performance of a project.
not uncommon, it is sometimes possible to address
For example, the technical testing program can
these by examining the background of the feasibility
have a dramatic effect on production ramp up
study and other claims in detail. It is also important to
rates. In one of the most commonly cited studies
evaluate the effect of any changes.
of project start-up, Terry McNulty evaluates 41
In some cases, project developers’ experience
mining projects and categorises them into four
with the actual minerals and processes will cause
series based on their performance of operating rate
them to change the specific processing steps used
versus time. (‘Developing Innovative Technology’,
to produce the desired product. For example, in an
Terry McNulty, Mining Engineering, October 1998,
iron ore concentrator, the operating party may decide
pp. 51-52.) In this analysis, only those projects that
to substitute one form of separation technology for
relied on mature technology and “thorough pilot-
another due to ongoing test work and production
scale testing of any potentially risky unit operations
experience. Operators continuously evaluate ways
such as semiautogenous (SAG) milling” achieved
to improve throughput, product specifications and
100 percent of design capacity within 18 months of
recoveries. As they gain experience, they can decide
commissioning or start-up. Projects with one or more
to deviate from the feasibility study process. In
deficiencies, including those where “pilot-scale test
these situations, the evaluation should start with
work is incomplete or may have been conducted
determining if the process changes resulted in
on non-representative samples” or where “feed
material reductions in: production volumes; product
characteristics, such as ore mineralogy, were not fully
mix; product specifications; and product values.
understood” were able to achieve only 90 percent
If any of the above were substantially reduced due
and 70 percent of design capacity (respectively) after
to process changes, it is reasonable for investors and
18 months.
other stakeholders to seek and obtain justification for
Thus, not surprisingly, the best place to start when
the process change. Sometimes, the change will be
investigating disputes that stem from execution
due to the uncertainty inherent in the behaviour of
that differs from the assumptions in the feasibility
naturally occurring minerals in a production process;
study is often with the feasibility study itself. Where
in other cases, the operator may have substituted a
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ISSUES WITH FEASIBILITY STUDIES IN MINING ARBITRATIONS
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lower capital cost set of operations in order to save
employment levels and product mix. This situation is
money. Of course, it can sometimes be a combination
more common where a government entity is involved
of the two – a lower cost process is substituted
in providing funding – whether direct investment,
based on additional test and production results.
infrastructure or special tax relief – on the basis of
It is this last case that can be the most difficult to
the feasibility study. In some cases, governments
address. This has been particularly difficult in recent
seek additional downstream processing of minerals
times where cost inflation in mining projects has
in order to create more jobs and add more value to
made even ‘lower cost’ process changes more
the minerals in their jurisdiction prior to exporting.
expensive than envisioned in the feasibility study for
These goals can be in conflict with a project operator,
the more costly process.
Situations where the experimental
bases for the process design are
not clearly defined in the feasibility
study can be more difficult to assess.
Sometimes, a project developer will
claim that a process has been ‘fully
tested’ and ‘proven’, but withholds the
specific details due to confidentiality
“Situations where the experimental bases for
the process design are not clearly defined in
the feasibility study can be more difficult to
assess.”
or other concerns. As noted above,
unless the test and pilot work has been
done using representative samples of the actual
who is likely to be seeking to maximise the value of
ore, the process is likely to experience difficulties
the project, which can mean producing a saleable
in ramping up and operations. In these cases, the
product as quickly as possible. Adding downstream
claims made during the negotiating process must
operations can delay the production of saleable
be carefully evaluated and compared with the
products due to the added complexity of additional
actual performance to determine the extent to
operations.
which any performance shortfall was the result
Of course, there may be situations where the
of misrepresentations of the state of process
additional downstream processing that was
development or other factors.
anticipated in the feasibility study becomes less
There are also cases where changes result
desirable as the project progresses, due to market,
in material differences in other factors, such as
technology or other factors. However, even in these
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ISSUES WITH FEASIBILITY STUDIES IN MINING ARBITRATIONS
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cases, it would generally be advisable for the project
participants should be aware of the uncertainties and
manager to consider consulting with other relevant
any changes to the original project as a consequence
stakeholders before finalising decisions to defer
should be made in a manner that retains as much of
or abandon the downstream processing that was
the original intent of the project as possible. CD
included in the feasibility study.
Conclusion
In summary, while feasibility studies are critical
to the development of any mining or processing
project, they often contain uncertainties that will
David Persampieri
Vice President
Charles River Associates
T: +1 (617) 425 3093
E: [email protected]
result in changes to the project as it is developed. All
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Vice President
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T: +1 (617) 425 3093
E: [email protected]
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